Even as China has grown to become the world's largest cellular market, with more than 800 million mobile-phone users, its handset manufacturers have trailed big global brands both at home and abroad. This year, that's finally started to change. A few numbers tell the story: Shenzhen-based ZTE has jumped to No. 4 from No. 7 a year ago in terms of phones shipped, behind only Nokia (NOK), Samsung, and LG, according to market researcher iSuppli. Its crosstown rival, Huawei Technologies, is tied for No. 9, while TCL (which owns rights to the Alcatel brand for cell phones) and Beijing Tianyu are Nos. 11 and 12, respectively. "These guys are really, really taking market share now," says Sigve Brekke, head of Asia for Telenor, a Norwegian wireless carrier with operations in India and other Asian countries.
The Chinese gains have come largely at home as the mainland's three cellular operators last year started offering 3G service. Now the Chinese aim to boost sales in the U.S. and Western Europe by offering smartphones that carriers can sell for less than $100 apiece, says Tina Teng, an analyst with iSuppli. "If they want to get into the more mature markets, every Chinese company needs to have a good, solid smartphone," Teng says.
While few Western consumers will know the Chinese brands, telecom operators are very familiar with the bigger names. In recent years, Huawei and ZTE have made enormous gains in selling networking equipment to carriers worldwide. They're aiming to build on those telecom relationships to sell handsets. "We have a very strong big brother: the Huawei infrastructure business," says Victor Xu, chief marketing officer for Huawei Device, a subsidiary that makes handsets such as the new Ideos smartphone. While he acknowledges the Chinese won't soon compete at the very highest level in smartphones, he figures they can carve out a profitable niche among consumers who can't afford top brands. "If you can achieve 70 percent of the user experience of the iPhone, it's good enough," Xu says.
Smaller Chinese companies that started out as suppliers to multinationals are growing fast. Zoom Technologies made phones for Motorola (MOT) and others, then launched its own handset brand last year. In June, Zoom bought a 185-person design firm in Beijing to help it develop phones to suit the fickle tastes of younger buyers. "Youngsters in China don't buy a phone and then wait till the contract is up before buying another one," says Anthony K. Chan, Zoom's chief financial officer. "They buy one on their birthday, one on Valentine's Day, one on Chinese New Year. Buying a phone is like buying a pair of jeans." The company expects its sales to grow as much as 38 percent this year, to $260 million.
G'Five International, founded in 2003 as a producer of molds for electronics parts, started making inexpensive handsets in 2007, mostly for emerging markets. The Hong Kong company ships about 1.5 million phones a month from factories in China to India, Egypt, and other developing countries. While G'Five's cheapest models run just $30-$40 apiece, the company plans to get into developed markets with more sophisticated phones, says Chief Executive Officer Winston Zhang, including Android smartphones next year. The company already has 300 handsets in its portfolio, and is working on more. "We can have 500 models, because we can design very fast," says Zhang.
Longtime China tech watchers may have a sense of déjà vu. A decade ago, TCL, Ningbo Bird, and other Chinese manufacturers seemed poised to displace big foreign names as the mainland's dominant brands. However, Nokia and Samsung quickly recovered, overwhelming the locals with feature-rich phones at both the top and bottom of the market. "This time is different," says Vittorio Di Mauro, a former Alcatel executive who is now a vice-president at TCL and divides his time between company headquarters just north of Hong Kong and TCL's design center in Milan. "Today we are truly a global company." When TCL initially tried to play in the big leagues in the early 2000s, almost all of its sales were in China; today, China accounts for just 7 percent of its revenue. TCL's Hong Kong-listed shares have more than quadrupled this year, and revenue is on track nearly to double.
Another important change: It's now easier for companies to break into manufacturing. A decade ago, handset makers needed to develop much of the electronic guts of their phones. Today, suppliers such as Taiwanese semiconductor shop MediaTek offer phone systems on a single chip, greatly simplifying the design and production of handsets. Software isn't the barrier to entry it once was, either: Instead of developing their own sophisticated software, the Chinese can now adopt Android, Google's (GOOG) open operating system. "For the Chinese industry," Di Mauro says, "Android levels the playing field."
The bottom line: After years of lagging multinational rivals, Chinese handset makers are growing fast. Now they're aiming for Western markets.